Legal aspects of crowdfunding and alternative forms of financing for start-ups

Crowdfunding and other alternative forms of financing have become important instruments for start-ups to raise capital in recent years. These innovative financing methods offer great opportunities, but also entail specific legal challenges. This article highlights the most important legal aspects that startups need to consider when using crowdfunding and alternative forms of financing.

Forms of crowdfunding

There are various forms of crowdfunding, each of which has different legal implications:

1. Donation-based crowdfunding: donations without consideration
2. Reward-based crowdfunding: consideration in the form of products or services
3. Equity-based crowdfunding: participation in the company
4. Lending-based crowdfunding: Lending through the crowd

Legal framework

The legal framework for crowdfunding in Germany comprises various laws and regulations, including

1. Small Investor Protection Act
2. Asset Investment Act (VermAnlG)
3. German Securities Prospectus Act (WpPG)
4. German Investment Code (KAGB)
5. German Banking Act (KWG)
6. Payment Services Supervision Act (ZAG)

Since 2015, there have been specific regulations for crowdfunding in Germany in the Small Investor Protection Act, which provide for certain simplifications for crowdfunding platforms and projects.

Key legal aspects

1. Obligation to publish a prospectus
   Equity-based and lending-based crowdfunding may be subject to a prospectus requirement under the Asset Investment Act or the Securities Prospectus Act. However, there are exceptions:

• • For crowdfunding projects with a volume of up to EUR 6 million within 12 months, a simplified information obligation applies in the form of an investment information sheet (VIB).
  • If the total consideration is less than EUR 100,000 within 12 months, the obligation to publish a prospectus does not apply at all.

2. Permit requirement for platforms
   Depending on their structure, crowdfunding platforms may provide financial services that require a permit:

• • Brokerage of financial instruments: Licensing requirement according to § 32 KWG
  • Operation of a trading platform: Possible licensing requirement as a multilateral trading facility
  • Payment services: Possible licensing requirement under the ZAG

3. Consumer protection
   The Small Investor Protection Act provides for various measures to protect small investors, including:

• • Right of withdrawal within 14 days
  • Maximum investment amount of EUR 25,000 per investor and project (for asset investments)
  • Obligation of the investor to provide self-disclosure for investments over EUR 1,000

4. Tax aspects
   The tax treatment of crowdfunding income depends on the type of crowdfunding:

• • Donation-based: Generally treated as a gift
  • Reward-based: Mostly subject to sales tax
  • Equity-based and lending-based: Capital gains tax or withholding tax for investors

5. Corporate law aspects
   In the case of equity-based crowdfunding, corporate law issues must be clarified:

• • Selection of the appropriate form of participation (e.g. silent partnership, profit participation rights)
  • Regulation of information and co-determination rights of investors
  • Design of exit scenarios

6. Data protection
   Crowdfunding platforms and project initiators must comply with the requirements of the GDPR, particularly when processing investors’ personal data.

Special challenges for start-ups

1. Regulatory complexity
   The legal requirements for crowdfunding campaigns can be complex and difficult for startups to keep track of.
2. Costs of compliance
   Compliance with legal requirements, particularly in the case of larger financing rounds, can incur considerable costs.
3. Investor communication
   Legally compliant communication with a large number of small investors places special demands on the startup.
4. International aspects
   Additional legal aspects must be taken into account for cross-border crowdfunding campaigns.

Practical tips for start-ups

1. Careful planning: Plan your crowdfunding campaign carefully and consider the legal aspects right from the start.
2. Choosing the right platform: Choose a reputable and legally compliant crowdfunding platform.
3. Transparency: Provide all relevant information about your project and the associated risks in a transparent manner.
4. Legal advice: Consult a lawyer specializing in crowdfunding at an early stage to avoid legal pitfalls.
5. Documentation: Carefully document all the steps of your crowdfunding campaign so that you can provide evidence in the event of a dispute.
6. Tax advice: Clarify the tax implications of your crowdfunding campaign with a tax advisor.
7. Sustainable investor care: Develop a strategy for long-term communication and relationship management with your crowdfunding investors.
8. Compliance monitoring: Implement processes to continuously monitor compliance with legal requirements, especially for longer-term financing.

Crowdfunding and alternative forms of financing offer start-ups promising opportunities to raise capital. However, careful consideration of the legal aspects is essential in order to minimize risks and gain the trust of investors. By organizing their crowdfunding activities in a professional and legally compliant manner, startups can not only raise capital, but also gain valuable supporters and brand ambassadors.Given the complexity of the legal framework and the potential consequences of non-compliance, it is advisable for startups to seek expert legal support when planning and implementing crowdfunding campaigns. A specialized lawyer can help to make the campaign legally compliant and avoid potential pitfalls.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.